DETERMINATION OF MERGER NOTIFICATION M/12/006 - AIRTRICITY/PHOENIX Section 21 of the Competition Act 2002 Proposed acquisition by SSE plc, through Airtricity Energy Supply (Northern Ireland) Limited and Airtricity Limited, of Phoenix Supply Limited, Phoenix Energy Limited and Phoenix Energy Supply Limited Dated 15 June 2012 Introduction 1. On 16 May 2012, the Competition Authority, in accordance with Section 18 of the Competition Act, 2002 (“the Act”), was notified, on a mandatory basis, of a proposal whereby SSE plc (“SSE” or the "Acquirer") would acquire sole control through Airtricity Energy Supply (Northern Ireland) Limited (“AESNI”) and Airtricity Limited (“Airtricity”) of Phoenix Supply Limited (“PSL”), Phoenix Energy Limited (“PEL”) and Phoenix Energy Supply Limited (“PESL”) (together the “Target”) from Terra Firma Capital Partners (“Terra Firma”) (the “Vendor”). The Undertakings Involved The Acquirer SSE 2. SSE is an energy company with operations in the United Kingdom and on the island of Ireland. 3. SSE is involved in the business of electricity generation in the United Kingdom and the island of Ireland with currently 11,330MW of electricity generation capacity. Approximately 410MW of this generation capacity can be attributed to the State. 4. SSE is also involved in the businesses of electricity transmission and distribution in northern Scotland and of electricity distribution in central and southern England. SSE is not, however, involved in the business of electricity transmission or distribution in the island of Ireland. 1 5. SSE also supplies electricity to residential and business customers in the United Kingdom. SSE supplies electricity to residential and business customers in Northern Ireland through its subsidiary AESNI. SSE supplies electricity to residential and business customers in the State through its subsidiary Airtricity. 1 Electricity transmission and distribution systems encapsulate the infrastructure through which the transmission and distribution of electricity occurs. In the State, Electricity Supply Board (“ESB”) is the licensed owner of the electricity transmission system. EirGrid plc, a state-owned commercial company and independent of ESB, is the designated licensed operator of the electricity transmission system. The electricity distribution system in the State is owned and operated by ESB Networks, a subsidiary of ESB. Merger Notification M/12/006 – Airtricity / Phoenix 6. SSE is a participant in the wholesale gas market in the United Kingdom. SSE, however, does not sell gas in any wholesale market on the island of Ireland. 7. SSE also supplies gas to residential and business customers in the United Kingdom. However, it does not currently supply gas to any customers in Northern Ireland. SSE also supplies gas to residential and business customers in the State through its subsidiary Airtricity. 8. For the financial year ending 31 March 2011, SSE had worldwide turnover of €32,647.6 million 2 and a turnover in the State for the same period of €[…] million. AESNI 9. AESNI, a wholly-owned subsidiary of SSE, operates under a licence from the Utility Regulator of Northern Ireland (“the Utility Regulator”) and supplies electricity to residential and business customers in Northern Ireland. It has approximately […] residential electricity customers and […] business electricity customers in Northern Ireland. It does not currently supply gas to any customers in Northern Ireland. Airtricity 10. Airtricity, a wholly-owned subsidiary of SSE, operates under a licence from the Commission for Energy Regulation (“CER”) and supplies electricity and gas to residential and business customers in the State. It has […] electricity customers in the State (of which […] are residential customers and […] are business customers). Airtricity is the third biggest supplier of electricity to residential customers in the State behind Electric Ireland and Bord Gais. 3 Airtricity is the third biggest supplier of electricity to business customers in the State behind Electric Ireland and Energia. 4 Airtricity has […] gas customers in the State (of which […] are residential customers and […] are business customers). Airtricity is the seventh biggest supplier of gas to customers in the State behind Bord Gais, Energia, Vayu, Gazprom, Flogas and PEL.5 The Vendor Terra Firma 11. Terra Firma is a private equity firm based in the United Kingdom which raises funds from large institutional investors such as insurance companies, endowments, charitable foundations, and public and private pension funds. Terra Firma, amongst other things, owns and controls Kellen Investments Limited (a holding company), which in turn owns and controls Phoenix Energy Holdings Limited (“Phoenix Holdings”). Phoenix Holdings is the parent company of PSL, PEL and PESL. 2 Based on the European Central Bank €/GBP£ bilateral exchange rate for 2011 of €1/GBP£0.867. 3 Electricity and Gas Retail Markets Annual Report 2011, CER/12/072, available at http://www.cer.ie/en/electricity-retail-market-reports-and-publications.aspx?article=b0ba4820- 3227-499f-9879-16de76bdd5b0 4 Ibid 3. 5 Ibid 3. Merger Notification M/12/006 – Airtricity/Phoenix 2 12. Phoenix Energy Services Limited (“PES”), also a subsidiary of Phoenix Holdings, provides ancillary home energy services (including gas boiler maintenance and repair services and carbon monoxide detection) to its residential customers in Northern Ireland. PES, however, does not form part of the business to be acquired. The Target 13. The Target comprises PSL, PEL and PESL. However, PESL does not currently carry on any trading activity. PSL 14. PSL, a wholly-owned subsidiary of Phoenix Holdings, operates under a licence from the Utility Regulator and supplies gas to approximately 130,000 residential and business customers in the Greater Belfast area from the Phoenix Natural Gas Distribution network. 6 In addition, PSL trades approximately 110 million therms of natural gas per annum on the wholesale gas market in the United Kingdom. PSL is not involved in the business of electricity generation, transmission, distribution or supply on the island of Ireland. PEL 15. PEL, a wholly-owned subsidiary of Phoenix Holdings, operates under a licence from the CER and commenced trading in the State in November 2009. It currently supplies gas to […] business customers in the State. However, it does not supply gas to any residential customers in the State. PEL is not involved in the business of electricity generation, transmission, distribution or supply on the island of Ireland. 16. For the financial year ending 31 December 2011, PSL and PEL had a combined worldwide turnover of €[…] million and a combined turnover in the State for the same period of €[…] million. Rationale for the Proposed Transaction 17. The parties submit that “the proposed transaction will facilitate the Purchaser (and SSE) developing its gas offering in Northern Ireland and to the ultimate benefit of an established customer base.”7 Third Party Submissions 18. The Authority received one third-party submission during its Phase 1 investigation from a business located in Northern Ireland. The submission raised concerns about the impact of the proposed transaction on competition in the energy sector in Northern Ireland and the service received from suppliers in Northern Ireland. The Authority confirmed the particulars of the submission with the business and referred it to the appropriate bodies in the United Kingdom and Northern Ireland. 6 Phoenix Natural Gas Distribution network does not form part of the proposed transaction. 7 Notification Form page 11. Merger Notification M/12/006 – Airtricity/Phoenix 3 Views of Regulators 19. The Authority consulted with CER in relation to the proposed acquisition. CER is the independent regulator of the electricity and natural gas sectors in the State. CER indicated to the Authority that it does not have any concerns regarding the proposed acquisition. 20. The Authority also consulted with the Utility Regulator in relation to the proposed acquisition. The Utility Regulator is an independent non- ministerial government department which regulates the Electricity, Gas and Water and Sewage industries in Northern Ireland. The Utility Regulator indicated to the Authority that it does not have any competition concerns regarding the proposed acquisition. The Utility Regulator also stated that although Airtricity does hold a gas supply licence, it does not currently have any gas customers in Northern Ireland. 21. Both regulators were very helpful during our investigation. Industry Background – Retail Supply of Gas 22. The parties informed the Authority in the notification that since there are few natural gas resources in the State, most of the gas consumed is purchased on international gas markets and imported through the natural gas network or through pipes which connect the State with the United Kingdom. Gas purchasers in the State are therefore exposed to fluctuations in international gas prices. Airtricity and AESNI acquire their gas supply from SSE. […] 23. Currently there is no single all island retail gas market similar to the Single Electricity Market. All suppliers of gas to the retail market in the State must hold both a Gas Supply 8 and a Gas Shipping 9 Licence from the CER. The holder of such licences can supply to all the retail segments in the State identified at paragraph 25 below provided the licence holder complies with the conditions of its licence. 10 24. The retail supply of gas in the State is divided into two segments -